Notes to Condensed Consolidated Financial Statements (Unaudited)
Nine Months Ended December 31, 2013 and 2012
The accompanying condensed consolidated financial statements of Saleen Automotive, Inc. and subsidiaries (“Saleen,” “we,” “us, “our” and “our Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the year ending March 31, 2014, or for any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended March 31, 2013, which are included in the Company’s Current Report on Form 8-K for such year filed on June 27, 2013, and amended on July 11, 2013, August 8, 2013, August 30, 2013 and September 16, 2013. The combined balance sheet as of March 31, 2013, has been derived from the audited financial statements included in the Form 8-K filed on June 27, 2013, and amended on July 11, 2013, August 8, 2013, August 30, 2013 and September 16, 2013.
NOTE 1 – NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
History of the Company
Saleen Automotive, Inc. (formerly W270, Inc., the “Company”) was incorporated under the laws of the State of Nevada on June 24, 2011. The Company issued
5,000,000
shares of its common stock to Mr. Wesley Fry (“Fry”) at inception in exchange for organizational costs/services incurred upon its incorporation. Following our formation, we issued an additional
1,000,000
shares of our common stock to Mr. Fry, in exchange for a business plan along with a client/customer list related to his information technology consulting services.
On June 21, 2012, the Company issued
2,000,000
shares of its common stock for a total of
$20,000
.
On November 30, 2012, Wesley Fry (“Fry”) and W-Net Fund I, L.P. ( “W-Net”), entered into a Stock Purchase Agreement (the “Purchase Agreement”), pursuant to which Fry would sell to W-Net, and W-Net would purchase from Fry, an aggregate of
6,000,000
shares of the W270, Inc.’s common stock (the “Shares”), which Shares represented
75.0%
of the issued and outstanding shares of the Company’s common stock, (2) Fry would release the Company from any and all existing claims, (3) Fry would settle various liabilities of the Company and (4) Fry would indemnify W-Net and the Company from liabilities arising out of any breach of any representation, warranty, covenant or obligation of Fry. The closing occurred on November 30, 2012. W-Net paid for the Shares with personal funds. Simultaneous with the closing, W-Net sold to Verdad Telecom, Inc. one half of the Shares. There are no arrangements or understandings by and among members of both the former and new control groups and their associates with respect to election of directors or other matters of the Company.
Merger
On May 23, 2013, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Saleen California Merger Corporation, our wholly-owned subsidiary, Saleen Florida Merger Corporation, our wholly-owned subsidiary, Saleen Automotive, Inc. (“Saleen Automotive”), SMS Signature Cars (“SMS” and together with Saleen Automotive, the “Saleen Entities”) and Steve Saleen (“Saleen” and together with the Saleen Entities, the “Saleen Parties”). The closing (the “Closing”) of the transactions contemplated by the Merger Agreement (the “Merger”) occurred on June 26, 2013. At the Closing (a) Saleen California Merger Corporation was merged with and into SMS with SMS surviving as one of our wholly-owned subsidiaries; (b) Saleen Florida Merger Corporation was merged with and into Saleen Automotive with Saleen Automotive surviving as one of our wholly-owned subsidiaries; (c) holders of the outstanding capital stock of Saleen Automotive received an aggregate of
554,057
shares of our Super Voting Preferred Stock and holders of the outstanding capital stock of SMS received no consideration for their shares; and (d) approximately
93%
of the beneficial ownership of our common stock (on a fully-diluted basis) was owned, collectively, by Saleen (including shares of our Super Voting Preferred Stock issued to Saleen pursuant to the Assignment and License Agreement discussed below) and the former holders of the outstanding capital stock of Saleen Automotive. As a result of the Merger we are solely engaged in the Saleen Entities’ business, Saleen Automotive’s officers became our officers and Saleen Automotive’s
three
directors became members of our
five
-member board of directors (which currently has
two
vacancies). In October 2013, SMS effected an amendment to its articles of incorporation to change its name to Saleen Signature Cars.
On May 23, 2013, we also entered into an Assignment and License Agreement with Saleen pursuant to which Saleen agreed, as of the effective time of the Merger, to contribute certain intellectual property that relates to the “Saleen” brand name and related rights which are currently owned by him to us, license to us the right to use his image, signature, full name, voice, biographical
materials, likeness, and goodwill associated with the “Saleen” brand, and assign to us all shares of the capital stock of SMS Retail – Corona, a California corporation, and Saleen Automotive Show Cars, Inc., a Michigan corporation. On June 21, 2013, we amended the Assignment and License Agreement to terminate the obligation to assign to us all shares of the capital stock of SMS Retail – Corona and Saleen Automotive Show Cars, Inc. and Saleen agreed to dissolve those entities within 30 days after the Closing. Concurrently with the Closing, pursuant to the Assignment and License Agreement, as amended, Saleen assigned certain intellectual property that relates to the “Saleen” brand name and related rights which are currently owned by him to us, and licensed the right to use his image, signature, full name, voice, biographical materials, likeness, and goodwill associated with the “Saleen” brand to us, and commenced the process of dissolving each of SMS Retail – Corona and Saleen Automotive Show Cars, Inc. The aforementioned license may only be terminated in the event we file a petition for relief under Chapter 7 of the U.S. Bankruptcy Code, or a petition for relief is converted to a Chapter 7 proceeding under the U.S. Bankruptcy Code. In exchange for entering into the Assignment and License Agreement, as amended, we issued to Saleen, as of the effective date of the Merger,
341,943
shares of our Super Voting Preferred Stock.
On June 17, 2013, we consummated a merger with WSTY Subsidiary Corporation, our wholly-owned subsidiary, pursuant to which we amended our articles of incorporation to change our name to Saleen Automotive, Inc.
We are presently authorized under our articles of incorporation, as amended to date, to issue
500,000,000
shares of common stock, par value
$0.001
per share, and
1,000,000
shares of preferred stock, par value
$0.001
per share. Prior to January 13, 2014,
896,000
shares were designated Super Voting Preferred Stock. The rights of our Super Voting Preferred Stock were set forth in a Certificate of Designations, Preferences, Limitations, Restrictions and Relative Rights of Super Voting Preferred Stock (the “Certificate of Designations”) which became effective on June 17, 2013. As of the Closing, we had
8,000,000
shares of common stock issued and outstanding and
896,000
shares of Super Voting Preferred Stock issued and outstanding.
Under the terms of the Merger Agreement, all of the outstanding shares of capital stock held by Saleen Automotive’s former shareholders were exchanged for
554,057
shares of our Super Voting Preferred Stock, and under the terms of the Assignment and License Agreement, as amended, we issued to Saleen
341,943
shares of our Super Voting Preferred Stock. Each share of our Super Voting Preferred Stock was convertible into
125
shares of our common stock. Accordingly, as a result of the Merger and the transactions effectuated pursuant to the Assignment and License Agreement, as amended, Saleen and the former shareholders of Saleen Automotive owned approximately
112,000,000
shares of our common stock on an as-converted basis, and our existing stockholders owned
8,000,000
shares of our common stock.
On July 9, 2013, holders of a majority of the outstanding shares of our Super Voting Preferred Stock voted to amend the Certificate of Designations to provide that (1) each share of our Super Voting Preferred Stock will immediately and automatically convert into
125
shares of our common stock at such time that we file, at such time as determined by our board of directors, an amendment to our articles of incorporation (a) effecting a reverse stock split of our common stock or (b) effecting an increase in the authorized shares of our common stock, in each case so that we have a sufficient number of authorized and unissued shares of our common stock to permit the conversion of all outstanding shares of our Super Voting Preferred Stock into our common stock, and (2) the holders of a majority of the outstanding shares of our Super Voting Preferred Stock may elect to convert less than all but at least
50%
of the outstanding shares of our Super Voting Preferred Stock, with the applicable percentage designated by such holders. On July 9, 2013, holders of a majority of the outstanding shares of our Super Voting Preferred Stock also voted to convert, upon the effectiveness of the aforementioned amendment to the Certificate of Designations,
696,000
shares of our Super Voting Preferred Stock into
87,000,000
shares of our common stock, representing approximately
77.68%
of the outstanding shares of our Super Voting Preferred Stock. Such conversion became effective on July 18, 2013, upon the filing of the amendment to the Certificate of Designations. On January 13, 2014, pursuant to an amendment to our articles of incorporation increasing our authorized shares of common stock to
500,000,000
, all of the outstanding shares of our Super Voting Preferred Stock automatically converted into shares of our common stock, and the Super Voting Preferred Stock ceased to be a designated series of preferred stock.
Upon completion of the Merger and assuming the conversion of all the remaining Super Voting preferred stock into shares of common stock, the former stockholders of Saleen Automotive owned approximately
93%
of the outstanding shares of our common stock (including shares of Super Voting Preferred Stock convertible into shares of our common stock) and the holders of the outstanding shares of our common stock prior to the Merger owned the balance. As the owners and management of Saleen Automotive have voting and operating control of the Company after the Merger, the transaction has been accounted for as a recapitalization with the Saleen Entities deemed the acquiring companies for accounting purposes, and our company deemed the legal acquirer. Due to the change in control, the consolidated financial statements reflect the historical results of the Saleen Entities prior to the Merger and that of the combined company following the Merger. Common stock and the corresponding capital amounts of the Company pre-Merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the Merger. The amount of debt assumed upon the reverse merger of
$39,547
, legal and closing costs of
$46,000
, and a dividend of an aggregate amount of
$280,000
paid to our stockholders as of May 23, 2013 have been reflected as a cost of the Merger in the statement of operations.
The Company develops, manufactures and sells high-performance cars built from base chassis’ of Ford Mustangs, Chevrolet Camaros, and Dodge Challengers, as well as exotic sports cars. We are a low volume specialist vehicle design, engineering and manufacturing company focusing on the mass customization of OEM American Sports Cars and the production of high performance USA-engineered premium sports and racing cars. Saleen-branded products include a complete line of upgraded muscle cars, high performance cars, automotive aftermarket specialty parts and lifestyle accessories. We are also developing a next-generation American supercar along with hybrid and zero-emission vehicles for commercial applications and consumer markets.
Consolidation policy
The consolidated financial statements for the nine month period ended December 31, 2013 include the accounts of the Company and its wholly owned subsidiaries, Saleen Automotive, Inc. a Florida corporation, Saleen Signature Cars, a California corporation and Saleen Sales Corporation, a California corporation. Intercompany transactions and balances have been eliminated in consolidation.
Reclassification of Certain Prior Period Information
We have reclassified certain prior period amounts to conform to the current period presentation, including the reclassification of engineering salaries of
$6,438
to research and development expenses and sales and marketing salaries of
$40,769
to sales and marketing expenses from general and administrative operating expenses. The reclassification of these amounts had no impact on consolidated net income or cash flows.
Going Concern
The Company’s combined financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine months ended December 31, 2013, the Company incurred a net loss of
$5,117,754
and utilized
$3,375,364
of cash in operations. The Company also has a stockholders' and working capital deficit of
$8,066,266
and
$7,192,703
, respectively, as of December 31, 2013, and as of that date, the Company is delinquent in payments of
$729,314
of payroll taxes and
$1,402,889
of outstanding notes payable are in default. The current cash resources of the Company are insufficient to meet its planned business objectives and operational needs without additional financing. These and other factors raise substantial doubt about the Company’s ability to continue as a going concern. As a result, the Company's independent registered public accounting firm issued a report on our March 31, 2013 financial statements that raised substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital and to ultimately achieve sustainable revenues and profitable operations. At December 31, 2013, the Company had cash on hand in the amount of
$10,840
. On October 8, 2013, the Company entered into a Secured Promissory Note with W-Net pursuant to which W-Net loaned an aggregate of
$500,000
to the Company. The note bears interest at the rate of
8%
per annum, which is payable along with all principal under the note on October 7, 2014, unless earlier repaid. The Company’s obligations under the note are secured by a second priority security interest in all of its assets, other than an S7 automobile in which W-Net has a first priority security interest. In addition, during the nine months ended December 31, 2013, the Company entered into Subscription Agreements with individual accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company an aggregate of
3,786,666
shares of its restricted common stock at a per share price of
$0.15
for aggregate proceeds of
$544,000
, net of issuance costs of
$24,000
. Additional Subscribers purchased restricted common shares of
1,316,667
and
686,666
in January and February 2014, respectively, at a per share price of
$0.15
for aggregate proceeds of
$197,500
and
$103,000
, respectively. However, additional funding will be needed to continue operations through March 31, 2014, which the Company currently anticipates raising through the consummation of additional Stock Subscriptions. In addition, management will need and is currently seeking additional funds, primarily through the issuance of debt or equity securities for cash to operate the Company’s business beyond March 31, 2014. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on its operations, in the case of debt financing or cause substantial dilution for its stockholders, in case or equity financing.
Use of Estimates
Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management has estimated the collectability of its accounts receivable, the valuation of long lived assets, the assumptions used to calculate its derivative liabilities, and equity instruments issued for financing and compensation. Actual results could differ from those estimates.
Fair value of Financial Instruments
The Company adopted ASC topic 820, “Fair Value Measurements and Disclosures” (ASC 820), formerly SFAS No. 157 “Fair Value Measurements,” effective January 1, 2009. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There was no impact relating to the adoption of ASC 820 to the Company’s financial statements.
Financial instruments consist principally of cash, accounts payable and accrued liabilities, and notes payable. The carrying amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively short-term nature. It is management’s opinion that the Company is not exposed to any significant currency or credit risks arising from these financial instruments.
Authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Inputs, other than the quoted prices in active markets, that is observable either directly or indirectly.
Level 3 Unobservable inputs based on the Company’s assumptions.
The following table presents certain investments and liabilities of the Company’s financial assets measured and recorded at fair value on the Company’s condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of December 31, 2013.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Fair value of Derivative Liability at December 31, 2013
|
$
|
—
|
|
|
$
|
1,694,000
|
|
|
$
|
—
|
|
|
$
|
1,694,000
|
|
Derivative financial instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company used a Monte Carlo option pricing model to value the derivative instruments at inception, and on subsequent valuation dates is using a weighted average Black–Scholes Model. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Cash held in trust by related party
During the year ended March 31, 2013, the Company instituted a policy of having new investor funds held a trust account at Michaels Law Group, a law firm owned by a shareholder and board member. Funds held in trust are released as requested by the Company by agreement of a management committee. As of March 31, 2013,
$175,000
of funds was held in trust by Michaels Law Group. As of December 31, 2013, all funds held in trust have been disbursed to the Company.
Allowance for Doubtful Accounts
The Company recognizes an allowance for doubtful accounts to ensure trade receivables are not overstated due to uncollectability. For the most part, the company generally requires advance payments for cars and credit card payments for parts. As a result, the Company had an allowance for doubtful accounts of
$37,869
at December 31, 2013 and
none
at March 31, 2013.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined principally on a first-in-first-out average cost basis. Inventories consist primarily of parts for both resale and conversion of automotive chassis. The Company will typically buy the automobile chassis of the vehicle to be converted from the dealer placing the order and then modify the vehicle as ordered. The Company typically has no finished goods inventory as the Company builds to order.
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|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
March 31,
2013
|
Parts and work in process
|
$
|
197,752
|
|
|
$
|
288,224
|
|
S7 Supercar held for sale
|
250,000
|
|
|
250,000
|
|
Total inventories
|
$
|
447,752
|
|
|
$
|
538,224
|
|
Long-lived Assets
In accordance with ASC 350-30 (formerly SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
), the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made.
The Company had no such asset impairments at December 31, 2013 or March 31, 2013. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets.
Revenue Recognition
Sales of High Performance Cars and Parts
The Company generates revenues primarily from the sale of high performance automobiles and parts. The Company recognizes revenue from the sale of completed high performance cars and parts when there is persuasive evidence that an arrangement exists, delivery of the product has occurred and title has passed, the selling price is both fixed and determinable, and collectability is reasonably assured, all of which generally occurs upon shipment of the Company’s product or delivery of the product to the destination specified by the customer.
The Company determines whether delivery has occurred based on when title transfers and the risks and rewards of ownership have transferred to the buyer, which usually occurs upon acceptance by the customer when the Company places the cars or products with the buyer’s carrier. The Company regularly reviews its customers’ financial positions to ensure that collectability is reasonably assured. Except for warranties, the Company has no post-sales obligations.
Contract Revenue and Cost Recognition on Design Services
During the year ended March 31, 2013, the Company completed a contract with a movie producer to develop and manufacture working replicas of high performance racing “supercars” that are to be featured in a new movie. The Company recognizes revenues using the percentage-of-completion method of accounting by relating contract costs incurred to date to the total estimated costs at completion. This method is used because management considers costs to be the best available measure of progress on its contracts. Contract losses are provided for in their entirety in the period that they become known, without regard to the percentage-of-completion. The Company also recognizes as revenues costs associated with claims and unapproved change orders to the extent it is probable that such claims and change orders will result in additional contract revenue, and the amount of such additional revenue can be reliably estimated. As of December , 2013, and March 31, 2013, there were no contracts in progress.
Warranty Policy
The Company provides a three-year or
36,000
miles New Vehicle Limited Warranty with every Saleen 302 and 302SC Mustang, Saleen 570 Challenger, and Saleen 620 Camaro high performance vehicle. We provide a one-year or
12,000
miles New Vehicle Limited Warranty with every Saleen 351 Mustang, Saleen 570X Challenger, and Saleen 620X Camaro high performance vehicle. The vehicle limited warranty applies to installed parts and/or assemblies in new Saleen high performance cars. All of the unaltered parts are covered under the original full warranty of the OEM manufacturer of the base vehicles (Ford, Chevrolet, and Dodge). The Company has not experienced significant claims under its warranty policy, and management determined no accrual for warranty reserve was necessary at December 31, 2013 or March 31, 2013.
Business Segments
The Company currently has
one
operating business segment that is converting automobiles into high performance vehicles.
Research and Development Costs
Research and development costs consist of expenditures for the research and development of new products and technology. Research and development costs were
$489,723
and
$29,815
during the nine months ended December 31, 2013 and 2012, respectively, and were expensed as incurred.
Income Taxes
The Company accounts for income taxes under FASB Codification Topic 740-10-25 (“ASC 740-10-25”). Under ASC 740-10-25, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740-10-25, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company maintains a valuation allowance with respect to deferred tax assets. The Company established a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry forward period under the Federal tax laws.
Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimate.
Stock Compensation
The Company uses the fair value recognition provision of ASC 718, “Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of such instruments. The Company uses the Black-Scholes-Merton option pricing model to calculate the fair value of any equity instruments on the grant date.
The Company also uses the provisions of ASC 505-50, “
Equity Based Payments to Non-Employees,
” to account for stock-based compensation awards issued to non-employees for services. Such awards for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASC 505-50.
At December 31, 2013 and March 31, 2013, the Company had no common stock options or warrants outstanding.
Earnings (Loss) per Share
The basic earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the weighted average number of common shares during the period. The diluted earnings (loss) per share is calculated by dividing the Company’s net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted average number of shares adjusted for any potentially dilutive debt or equity. Diluted earnings (loss) per share are the same as basic earnings (loss) per share due to the lack of dilutive items.
Weighted average number of shares outstanding has been retroactively restated for the equivalent number of shares received by the accounting acquirer as a result of the reverse merger as if these shares had been outstanding as of the beginning of the earliest period presented. Weighted average shares outstanding also includes the equivalent number of common shares that will be converted upon conversion of all the Super Voting Preferred Stock as of the earliest period presented as these shares have the same characteristics of common stock and for which management expects to convert (see Note 9).
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. The cost of property and equipment is depreciated or amortized on the straight-line method over the following estimated useful lives:
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Computer equipment and software
|
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3 years
|
Furniture
|
|
3 years
|
Machinery
|
|
3-10 years
|
Tooling
|
|
10 years
|
Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the lease term.
Recently Issued Accounting Standards
Recent accounting pronouncements did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
NOTE 2 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2013 and March 31, 2013:
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|
|
|
|
|
|
December 31, 2013
|
|
March 31, 2013
|
Tooling
|
$
|
453,969
|
|
|
$
|
384,293
|
|
Equipment
|
262,692
|
|
|
121,186
|
|
Leasehold improvements
|
203,311
|
|
|
129,402
|
|
Total, cost
|
919,972
|
|
|
634,881
|
|
Accumulated Depreciation and Amortization
|
(359,995)
|
|
|
(294,662)
|
|
Total Property, Plant and Equipment
|
$
|
559,977
|
|
|
$
|
340,219
|
|
Depreciation and amortization expense for the nine months ended December 31, 2013 and 2012 was
$65,332
and
$60,944
, respectively.
NOTE 3 – NOTES PAYABLE - IN DEFAULT
Notes payable are comprised as follows:
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December 31, 2013
|
|
March 31, 2013
|
Senior secured note payable to a bank, secured by all assets of Saleen Signature Cars, guaranteed by the U.S. Small Business Administration and personally guaranteed by the Company’s CEO, payable in monthly installments of $5,833, including interest at a rate of 6% per annum payable monthly, through October 26, 2019, currently in default (1)
|
$
|
527,216
|
|
|
$
|
582,258
|
|
Subordinated secured bonds payable, interest at 6% per annum payable at various maturity dates, currently in default (2)
|
414,500
|
|
|
414,500
|
|
Subordinated secured note payable, interest at 10% per annum, payable December 16, 2010, currently in default (3)
|
65,972
|
|
|
105,312
|
|
Subordinated secured note payable, interest at 10% per annum payable March 31, 2009, in default as of March 31, 2013, paid in full
|
—
|
|
|
124,513
|
|
Subordinated secured note payable for legal services rendered, non interest bearing, payable on October 25, 2013, currently in default (4)
|
42,749
|
|
|
47,749
|
|
Unsecured notes payable, interest at 10% per annum payable on various dates from July 31 to March 31, 2010, currently in default
|
320,000
|
|
|
320,000
|
|
Total notes payable
|
1,370,437
|
|
|
1,594,332
|
|
Less: current portion of notes payable
|
(1,370,437
|
)
|
|
(1,044,074
|
)
|
Notes payable, net of current portion
|
$
|
—
|
|
|
$
|
550,258
|
|
|
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1)
|
On February 6, 2014, Saleen Signature Cars received a Complaint from the bank filed in California Superior Court, Riverside County alleging, among other matters, breach of contract due to non timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and change in control as a result of the Merger. The case seeks immediate principal payment of
$520,388
plus accrued and unpaid interest. The Company currently is involved in discussions with the bank to seek a mutually agreeable outcome of the claim; however, the outcome is uncertain at the present time.
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2)
|
Bonds issued on December 1, 2008, 2009 and 2010, payable in full upon one year from issuance. The Bonds accrue interest at
6%
per annum and are secured by the personal property of Saleen Signature Cars. As of December 31, 2013 and March 31, 2013, respectively, the bonds were in default due to non-payment.
|
|
|
3)
|
Note payable issued on December 16, 2010 due in full on December 16, 2011. The note accrues interest at
10%
per annum and was secured by three vehicles held in inventory by Saleen Signature Cars. On June 7, 2013, the Company entered into a Settlement Agreement and Mutual General Release by canceling this note and issuing a new unsecured
6%
note payable due on or before August 19, 2013. The note was in default on December 31, 2013 due to non-payment.
|
|
|
4)
|
Non-interest bearing note payable dated January 25, 2013 due in full on October 25, 2013 or earlier upon the occurrence of certain events that have not occurred. The note is secured by interest in certain intellectual property. The note was in default as of December 31, 2013 due to non-payment. The Company made a payment of
$5,000
during the nine months ended December 31, 2013.
|
Total interest expense was
$362,784
and
$138,281
for the nine months ended December 31, 2013 and 2012, respectively. As of December 31, 2013 and March 31, 2013,
$350,630
and
$318,836
, respectively, of interest on notes payable remains unpaid.
NOTE 4 – NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties are as follows:
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
March 31, 2013
|
Unsecured note payable to a shareholder, non interest bearing, due on April 1, 2014. (1)
|
$
|
102,000
|
|
|
$
|
100,500
|
|
Note payable to a shareholder, secured by S7 Supercar automobile, interest at 10% per annum payable quarterly, due and paid off on May 23, 2013.
|
—
|
|
|
200,000
|
|
Unsecured note payable to a shareholder, interest at 10% per annum payable at various maturity dates, currently in default. (2)
|
32,452
|
|
|
60,000
|
|
Note payable to a shareholder, secured by S7 Supercar automobile, interest at 8% per annum payable in full on October 7, 2014.
|
500,000
|
|
|
—
|
|
Unsecured $100,000 revolving primissory note to a shareholder, interest at 12% per annum payable in full on November 14, 2014. $50,000 available at December 31, 2013.
|
50,000
|
|
|
—
|
|
Total notes payable, related parties
|
$
|
684,452
|
|
|
$
|
360,500
|
|
|
|
(1)
|
As of March 31, 2013, the Company had a bond payable of
$63,000
issued to a shareholder on December 1, 2008, 2009 and 2010, payable in full upon one year from issuance. The bond accrues interest at
6%
per annum and is secured by the real and personal property of Saleen Signature Cars. The Company also had a
$37,500
note payable to the same shareholder payable on various dates ranging from September 2008 to August 2010. The bond and the note were in default as of March 31, 2013. On May 21, 2013, the Company entered into a Settlement Agreement and Mutual General Release by cancelling the note and bond and agreeing to pay
$135,000
on or before April 1, 2014, which represents principal plus interest to be accrued through April 1, 2014. The Company also issued
264
shares of Super Voting Preferred Stock valued at
$12,500
in conjunction with this Agreement and accounted for this issuance of shares as interest expense.
|
|
|
(2)
|
Unsecured note payable to a related party issued on November 3, 2008 for original principal of
$60,000
with interest bearing at
10%
per annum and due in full on February 10, 2009. The note was in default at March 31, 2013. On May 22, 2013, the Company entered into a Settlement Agreement and Mutual General Release by agreeing to pay
$35,000
, of which
$5,000
is due by June 3, 2013,
$10,000
due by July 31, 2013,
$10,000
due by October 31, 2013, and
$10,000
by December 31, 2013. The Company also issued
739
shares of Super Voting Preferred Stock in conjunction with this Agreement valued at
$35,000
, of which
$22,803
was applied toward the principal balance of the note and
$12,197
was accounted for interest expense. The note was in default as of December 31, 2013 due to non-payment.
|
NOTE 5- SENIOR SECURED CONVERTIBLE NOTES PAYABLE
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
March 31, 2013
|
Senior secured convertible notes payable to private accredited investor group, convertible into 40,000,000 shares of common stock, interest accrued at 3% per annum, notes mature on June 25, 2017
|
$
|
2,924,422
|
|
|
$
|
—
|
|
Less: discount on notes payable
|
(1,448,524
|
)
|
|
—
|
|
Notes payable, net of discount
|
$
|
1,475,898
|
|
|
$
|
—
|
|
On June 26, 2013, pursuant to a Securities Purchase Agreement, the Company issued senior secured convertible notes, having a total principal amount of
$3,000,000
, to
12
accredited investors. The Notes were issued in a private placement, exempt from the Securities Act registration requirements. The Notes will pay
3.0%
interest per annum with a maturity of
4
years (June 25, 2017). No cash interest payments will be required, except that accrued and unconverted interest shall be due on the maturity date and on each
conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted.
Each Note is convertible at any time into common stock at a specified conversion price, which currently is
$0.075
per share The Note conversion price is subject to specified adjustments for certain changes in the numbers of outstanding shares of the Company's common stock, including conversions or exchanges of such. If the Company's shares are issued, except in specified exempt issuances, including the conversion of the Super Voting Preferred Stock, for consideration which is less than the then existing Note conversion price, then such conversion price will be reduced by full ratchet anti-dilution adjustments that will reduce the conversion price to equal the price in the dilutive issuance, regardless of the size of the dilutive issuance. During the nine months ended December 31, 2013, certain note holders converted
$75,578
of principal and
$3,216
of interest for
1,050,593
shares the common stock.
Each of the agreements governing the notes includes an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current exercise price. The Company considered the current FASB guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not within the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, the Company determined that the conversion prices of the notes are not a fixed amount because they are subject to fluctuation based on the occurrence of future offerings or events. As a result, the Company determined that the conversion features are not considered indexed to the Company’s own stock and characterized the fair value of these conversion features as derivative liabilities upon issuance. The Company determined that upon issuance on June 26, 2013, the initial fair value of the embedded beneficial conversion feature of the notes to be
$1,660,656
. These amounts were determined by management with the use of an independent valuation specialist using a Monte Carlo simulation option pricing model. As such, the Company recorded a
$1,660,656
derivative liability with an offsetting change to valuation discount upon issuance for financial reporting purposes (see note 6). During the nine months ended December 31, 2013, the Company amortized
$215,348
of the valuation discount, and the remaining unamortized valuation discount of
$1,448,524
as of December 31, 2013, has been offset against the face amount of the notes for financial statement purposes. The remainder of the valuation discount will be amortized as interest expense over the remaining four year term of the senior secured convertible notes payable.
NOTE 6 - DERIVATIVE LIABILITY
In June 2008, the FASB issued authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Under the authoritative guidance, effective January 1, 2009, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion feature of the Company’s senior secured convertible notes (described in Note 5), do not have fixed settlement provisions because their conversion prices may be lowered if the Company issues securities at lower prices in the future. The Company was required to include the reset provisions in order to protect the holders of the notes from the potential dilution associated with future financings. In accordance with the FASB authoritative guidance, the conversion feature of the notes was separated from the host contract (i.e., the notes) and recognized as a derivative instrument. The conversion feature of the notes has been characterized as a derivative liability to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
As of June 26, 2013, the date of issuance and December 31, 2013, the derivative liability was valued using a Monte Carlo option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
June 26, 2013
Date of Issuance
|
Conversion feature:
|
|
|
|
Risk-free interest rate
|
1.75
|
%
|
|
1.04
|
%
|
Expected volatility
|
75.0
|
%
|
|
73.3
|
%
|
Expected life (in years)
|
3.48 years
|
|
|
4 years
|
|
Expected dividend yield
|
—
|
|
|
—
|
|
|
|
|
|
Fair Value:
|
|
|
|
Conversion feature
|
$
|
1,694,000
|
|
|
$
|
1,660,656
|
|
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the volatility of five comparable guideline companies to estimate volatility for its common stock. The expected life of the conversion feature of the notes was based on the term of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.
NOTE 7 – RELATED PARTY TRANSACTIONS
During the nine month ended December 31, 2013 and 2012, we incurred
$131,787
and
$180,000
, respectively, in officers’ salary expense due our Director, Chairman and CEO, Mr. Steve Saleen that is unpaid. As of December 31, 2013 and March 31, 2013, the balances of
$452,287
and
$300,000
, respectively, were payable to Mr. Saleen for his unpaid officers’ salary. Effective March 31, 2013, Mr. Saleen agreed to defer the
$300,000
of unpaid salary for payment until April 1, 2014. During the nine months ended December 31, 2013, Mr. Saleen loaned the Company
$20,500
payable on demand.
During the nine month periods ended December 31, 2013 and 2012, we incurred
$203,771
and
$230,860
, respectively, in accounting advisory and CFO services with Miranda & Associates, a firm owned by our former Chief Financial Officer, Mr. Robert Miranda. As of December 31, 2013 and March 31, 2013, the balances of
$174,093
and
$167,222
, respectively, were payable to Miranda & Associates for these services. Effective March 31, 2013, Miranda & Associates and Mr. Miranda agreed to defer the
$167,222
of unpaid fees for payment until April 1, 2014. During the nine month ended December 31, 2013, the Company and Miranda & Associates amended their payment deferral agreement and the Company commenced partial payment of the unpaid fees.
During the nine months ended December 31, 2013 and 2012, we incurred
$325,488
and
$314,255
, respectively, in General Counsel Services and legal fees expense with Michaels Law Group, a firm owned by our Director and General Counsel, Mr. Jonathan Michaels. As of December 31, 2013 and March 31, 2013 the balances of
$251,505
and
$242,045
, respectively, were payable to Michaels Law Group for these services. Effective March 31, 2013, Michaels Law Group and Mr. Michaels agreed to defer the
$242,045
of unpaid fees for payment until April 1, 2014. During the nine months ended December 31, 2013, the Company and Michaels Law Group amended their payment deferral agreement and the Company commenced partial payment of the unpaid fees.
During the nine months ended December 31, 2013, we issued the equivalent of
5,277
shares of our Super Voting Preferred stock, to Robert J. Miranda and Jonathan Michaels (
2,638.5
shares each). These shares were valued at
$47.38
per share for a total value of
$250,000
. These shares were issued in consideration of Messrs. Miranda and Michaels service on the Company’s board of directors for the period April 1, 2013 through March 31, 2014. During the nine months ended December 31, 2013, we recorded
$250,000
of these director’s fees as director’s fee expense.
Included in general and administrative costs are related party costs of
$168,607
and
$187,144
for the three months ended December 31, 2013 and 2012, and
$529,259
and
$545,115
for the nine months ended December 31, 2013 and 2012, respectively.
The amounts of accounts payable to related parties as of December 31, 2013 and March 31, 2013 are as follows:
|
|
|
|
|
|
|
|
|
|
Related Party
|
|
December 31, 2013
|
|
March 31, 2013
|
Steve Saleen
|
|
$
|
452,287
|
|
|
$
|
300,000
|
|
Miranda & Associates
|
|
174,093
|
|
|
167,222
|
|
Michaels Law Group
|
|
251,505
|
|
|
242,045
|
|
Totals
|
|
$
|
877,885
|
|
|
$
|
709,267
|
|
During the nine months ended December 31, 2012, we incurred
$120,000
in consulting fees with a shareholder for marketing, business development, engineering, business management, and financial advisory services.
NOTE 8 – INCOME TAXES
As of December 31, 2013, we had net operating loss carry forwards for income tax reporting purposes of approximately
$13,400,000
that may be offset against future taxable income. Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs or a change in the nature of the business. The utilization of the losses is also limited by the fact that the combined companies prior to the reverse merger file on a separate basis and losses on one cannot offset profits on the other. Therefore, the amount available to offset future taxable income may be limited.
No tax benefit has been reported in the financial statements for the realization of loss carry forwards, as the Company believes based on the Company's past operations that there is no evidence or assurance that the carry forwards will be utilized. Accordingly, the potential tax benefits of the loss carry forwards are offset by a valuation allowance of the same amount.
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
March 31, 2013
|
Deferred income tax asset:
|
|
|
|
Net operating loss carry forward
|
$
|
4,773,000
|
|
|
$
|
3,316,000
|
|
Valuation allowance
|
(4,773,000
|
)
|
|
(3,316,000
|
)
|
Net deferred income tax asset
|
$
|
—
|
|
|
$
|
—
|
|
Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:
|
|
|
|
|
|
|
|
December 31, 2013
|
|
March 31, 2013
|
Tax expense at the U.S. statutory income tax
|
(34.00
|
)%
|
|
(34.00
|
)%
|
State tax net of federal tax benefit
|
(5.80
|
)%
|
|
(5.80
|
)%
|
Increase in the valuation allowance
|
39.8
|
%
|
|
39.8
|
%
|
Effective tax rate
|
—
|
%
|
|
—
|
%
|
The Company is primarily subject to U.S. federal and state income tax. As a result of the implementation of certain provisions of ASC 740, Income Taxes, (formerly FIN 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109), the Company performed an analysis of its tax liabilities and determined that there were no positions taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of December 31, 2013 and March 31, 2013, respectively.
Future changes in the unrecognized tax benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its statements of operations. The Company has incurred no interest or penalties as of December 31, 2013 and March 31, 2013.
NOTE 9 – SHAREHOLDERS’ EQUITY
As of December 31, 2013, the Company was authorized to issue
100,000,000
shares of common stock (
$0.001
par value) and
1,000,000
shares of preferred stock (
$0.001
par value), of which
896,000
shares were designated Super Voting Preferred Stock. In January 2014, the Company increased the number of common stock authorized to
500,000,000
which resulted in the automatic conversion of all outstanding shares of Super Voting Preferred Stock into common stock. After such conversion, the Super Voting Preferred Stock ceased to be designated series of preferred stock.
The rights of our Super Voting Preferred Stock were set forth in a Certificate of Designations which became effective on June 17, 2013. Pursuant to the provisions of the Certificate of Designations, each share of our Super Voting Preferred Stock was convertible into
125
shares of our common stock. The holders of shares of our Super Voting Preferred Stock were entitled to vote together with the holders of our common stock, as a single class, upon all matters submitted to holders of our common stock for a vote. Each share of Super Voting Preferred Stock was entitled to a number of votes equal to the number of shares of common stock into which it is
convertible at the record date. In the event of any liquidation, dissolution or winding up of our company, the assets available for distribution to our stockholders would be distributed among the holders of our Super Voting Preferred Stock and the holders of our common stock, pro rata, on an as-converted-to-common-stock basis. The holders of our Super Voting Preferred Stock were entitled to dividends in the event that we pay cash or other dividends in property to holders of outstanding shares of our common stock, which dividends would be made pro rata, on an as-converted-to-common-stock basis.
Under the terms of the Merger Agreement, all of the outstanding shares of capital stock held by Saleen Automotive’s former shareholders were exchanged for
554,057
shares of our Super Voting Preferred Stock, and under the terms of the Assignment and License Agreement, as amended, we issued to Saleen
341,943
shares of our Super Voting Preferred Stock. Each share of our Super Voting Preferred Stock is convertible into
125
shares of our common stock pursuant to the provisions of the Certificate of Designations.
During the nine month period ended December 31, 2013, the Company issued the equivalent of
12,178
shares of its Super Voting Preferred Stock in exchange for the settlement of claims, conditions of employment, director’s fees, and payment of information technology services. These shares were valued at
$47.38
per share for a total valuation of
$576,981
based on management’s estimate of value of the shares issued.
On July 9, 2013, the holders of a majority of the outstanding shares of our Super Voting Preferred Stock, pursuant to a written consent, elected to convert, upon the effectiveness of the amendment to the Certificate of Designations,
696,000
outstanding shares of the Company’s Super Voting Preferred Stock (approximately
77.68%
) into
87,000,000
shares of the Company’s common stock. On July 18, 2013, the Company filed an Amendment to Certificate of Designation After Issuance of Class or Series (the “Amendment”) amending the conversion rights of its Super Voting Preferred Stock. As a result of the Amendment, the Company’s board of directors will determine whether (if at all) the Company will effectuate any reverse stock split (or any increase in its authorized shares of common stock), and the appropriate time (if ever) for any such reverse stock split (or increase in its authorized shares of common stock). The remaining shares of Super Voting Preferred Stock were automatically converted into common stock on January 13, 2014.
During the nine months ended December 31, 2013, the Company entered into Subscription Agreements with certain accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company an aggregate of
3,786,666
shares of its common stock at a per share price of
$0.15
for aggregate proceeds of
$544,000
, net of issuance costs of
$24,000
.
As of December 31, 2013, the Company had
99,837,259
shares of common stock issued and outstanding and
200,000
shares of Super Voting Preferred Stock issued and outstanding. The Company had
no
warrants or options outstanding at December 31, 2013 or March 31, 2013, respectively. In conjunction with the amendment to the Company's articles of incorporation to increase the authorized shares of common stock to
500,000,000
, all of the outstanding shares of Super Voting Preferred Stock automatically converted into
25,000,000
shares of common stock, and the Super Voting Preferred Stock ceased to be a designated series of preferred stock.
Omnibus Incentive Plan
In December 2013, the Company's board of directors approved the 2013 Omnibus Incentive Plan (the “Plan”), which is administered by the Company’s board of directors (“Board”) or a committee thereof (the “Administrator”) as set forth in the Plan. The Plan provides for the granting of stock options, stock appreciation rights, restricted share awards and restricted stock units to employees, directors (including non-employee directors), advisors and consultants. Grants under the Plan vest and expire based on periods determined by the Administrator, but in no event can the expiration date be later than
ten years
from the date of grant (
five years
after the date of grant if the grant is an incentive stock option to an employee who owns more than
10%
of the total combined voting power of all classes of the Company’s capital stock (a “10% owner”)). Grants of stock options may be either incentive stock options or nonqualified stock options. The per share exercise price on an option, other than with respect to substitute awards, shall not be less than
100%
of the fair market value of the Company’s common stock on the date the option is granted (
110%
of the fair market value if the grant is to a 10% owner). A total of
28,905,763
shares of common stock have been authorized for issuance and reserved under the Plan. As of December 31, 2013, no options have been issued or granted under the Plan. The Plan was approved by the Company's stockholders on January 13, 2014.
In connection with the appointment of
two
new board members in October and December 2013 and upon the approval of the Plan by the Company’s stockholders on January 13, 2014, the Company is obligated to each of these new board members to grant options to purchase
250,000
shares of the Company’s common stock at an exercise price equal to the fair market value as of the date of grant, with subsequent grants to each of these new board members of options to purchase
125,000
shares of the Company’s common stock at a price equal to the then fair market value for each subsequent year that the board members serves as a director.
|
|
|
|
|
12/31/2013
|
Common Stock Outstanding
|
99,837,259
|
|
|
|
NOTE 10 – COMMITMENTS AND CONTINGINCIES
Facilities Leases
The Company rents
two
buildings totaling approximately
76,000
square feet on triple net leases through January, 2018. Rent expense during the nine months ended December 31, 2013 and 2012 was
$508,802
and
$348,199
, respectively. The current lease amendment provides for an annual escalation of
3%
in the rent each February. Past rent will be made up with the payment of an additional
$5,300
for
20
months starting in June, 2013.
The future minimum rental payments required under the non-cancelable operating leases described above as of December 31, 2013 are as follows:
|
|
|
|
Years ending March 31:
|
|
Lease Commitment
|
2014
|
|
$597,548
|
2015
|
|
615,154
|
2016
|
|
583,671
|
2017
|
|
599,689
|
2018
|
|
512,172
|
Employment Agreements
On August 1, 2011, Saleen Automotive entered into an Employment Agreement with Saleen under which he is currently compensated at the rate of
$20,000
per month, which shall not be reduced. The Employment Agreement provides for increased compensation of
$27,500
per month,
$32,500
per month and
$37,500
per month if Saleen Automotive is successful in raising a cumulative gross amount of
$5 million
,
$7.5 million
and
$10 million
in capital, respectively. The Employment Agreement also provides that Saleen Automotive will establish and maintain on or before September 30, 2012, a bonus program for Saleen that will compensate Saleen in amounts up to his annual bases salary, based on objective criteria. Saleen Automotive and Saleen are currently determining the parameters of that bonus plan. The Employment Agreement provides for Saleen’s service as Saleen Automotive’s Chief Executive Officer, and provides that Saleen Automotive is disallowed from changing the title of Saleen’s position or from diminishing his responsibilities of overseeing the operations of Saleen Automotive. The Employment Agreement has a term of
eight
years, and will automatically continue thereafter for successive 12 month periods unless and until either party gives the other party written notice of termination prior to the end of a term. In the event Saleen Automotive terminates the Employment Agreement without cause (as defined in the Employment Agreement), or otherwise materially breaches the Employment Agreement and such material breach remains uncured after
15
days’ written notice, Saleen will be entitled to a severance payment of
1.50
times his then-current annual salary plus
$2 million
, payable in cash or cash-equivalents within
30
days of the date of termination.
Litigation
The Company is involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that the management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.
The Company is currently a party to the several legal proceedings related to claims for payment that are currently accrued for in the financial statements as accounts or notes payable. Other legal proceedings that are pending as of December 31, 2013 are described as follows:
Saleen Signature Cars is a defendant in a case filed on November 28, 2011 in U.S. District Court in Massachusetts that alleges breach of contract related to a vehicle dispute. The case seeks
$75,000
of damages, plus legal fees and costs of litigation. Saleen Signature Cars has entered into a settlement with the Plaintiffs in this matter, the terms of which are to be fulfilled on or before May 15, 2014. In the interim, the matter has been stayed.
Saleen Signature Cars is a defendant in a case filed on April 13, 2012, in California Superior Court, Riverside County, that claims breach of contract related to an engine installed by a third party vendor. The suit claims
$200,000
in damages plus interest, legal fees and costs of litigation. The Company believes that the amount sought by the Plaintiff is excessive and without merit. The outcome is uncertain at the present time.
Saleen Signature Cars is a defendant in a case filed on February 6, 2014 in California Superior Court, Riverside County related to the Company's Senior Secured note payable to a bank (Note 3). The Complaint alleges, among others, breach of promissory note due to non timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and change in control as a result of the Merger. The case seeks immediate principal payment of
$520,388
plus accrued and unpaid interest. The Company believes that the claim sought by the bank is not accurate and is without merit; The outcome is uncertain at the present time.
NOTE 11 – SUBSEQUENT EVENTS
In January and February 2014, the Company entered into Subscription Agreements with certain accredited investors (the “Subscribers”) pursuant to which the Subscribers purchased from the Company an aggregate of
2,003,333
shares of its common stock at a price of
$0.15
per share, for aggregate proceeds of
$300,500
.
As discussed in Note 1, on January 13, 2014, the Company's stockholders approved and the Company amended it articles of incorporation to increase the number of authorized shares of common stock from
100,000,000
to
500,000,000
shares. In addition and as discussed in Note 9, the Company's stockholders also approved the 2013 Omnibus Incentive Plan which provides for the granting of stock options, stock appreciation rights, restricted share awards and restricted stock units to employees, directors (including non-employee directors), advisors and consultants..
In conjunction with the amendment to the Company's articles of incorporation to increase the authorized shares of common stock to
500,000,000
, all of the outstanding shares of Super Voting Preferred Stock automatically converted into
25,000,000
shares of common stock, and the Super Voting Preferred Stock ceased to be a designated series of preferred stock.
On February 6, 2014, Saleen Signature Cars received a Complaint from a bank filed in California Superior Court, Riverside County alleging, among other matters, breach of contract due to non timely payment of November and December 2013 principal amounts owed, which were paid as of December 31, 2013, and change in control as a result of the Merger. The case seeks immediate principal payment of
$520,388
plus accrued and unpaid interest. The Company currently is involved in discussions with the bank to seek a mutually agreeable outcome of the claim; however, the outcome is uncertain at the present time.